FIRST DIVISION

[G.R. No. L-42725. April 22, 1991.]

REPUBLIC BANK , petitioner, vs. COURT OF APPEALS and FIRST

NATIONAL CITY BANK , respondents.

Lourdes C. Dorado for petitioner.

Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE APPLIES

TO COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO COMPLY WITH RULE
ABSOLVES COLLECTING BANKS. — The 24-hour clearing house rule is a valid rule
applicable to commercial banks (Republic vs. Equitable Banking Corporation, 10 SCRA 8
[1964]; Metropolitan Bank & Trust Co. vs. First National City Bank, 118 SCRA 537). It is true
that when an endorsement is forged, the collecting bank or last endorser, as a general rule,
bears the loss (Banco de Oro Savings & Mortgage Bank vs. Equitable Banking Corp., 157
SCRA 188). But the unqualified endorsement of the collecting bank on the check should be
read together with the 24-hour regulation on clearing house operation (Metropolitan Bank
& Trust Co. vs. First National City Bank, supra). Thus, when the drawee bank fails to return a
forged or altered check to the collecting bank within the 24-hour clearing period, the
collecting bank is absolved from liability.
2. ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY RESPONSIBLE FOR
FORGERY OR ALTERATION. — Every bank that issues checks for the use of its customers
should know whether or not the drawer's signature thereon is genuine, whether there are
sufficient funds in the drawer's account to cover checks issued, and it should be able to
detect alterations, erasures, superimpositions or intercalations thereon, for these
instruments are prepared, printed and issued by itself, it has control of the drawer's
account, and it is supposed to be familiar with the drawer's signature. It should possess
appropriate detecting devices for uncovering forgeries and/or alterations on these
instruments. Unless an alteration is attributable to the fault or negligence of the drawer
himself, such as when he leaves spaces on the check which would allow the fraudulent
insertion of additional numerals in the amount appearing thereon, the remedy of the
drawee bank that negligently clears a forged and/or altered check for payment is against
the party responsible for the forgery or alteration (Hongkong & Shanghai Banking Corp. vs.
People's Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge
the amount so paid to the account of the drawer, if the latter was free from blame, nor
recover it from the collecting bank if the latter made payment after proper clearance from
the drawee.

DECISION

GRIÑO-AQUINO , J : p

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 On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No.
108854 for P240, Philippine currency, on its account in the respondent First National City
Bank ("FNCB" for brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check
had been delivered to Delgado, the amount on its face was fraudulently and without
authority of the drawer, SMC, altered by increasing it from P240 to P9,240. The check was
indorsed and deposited on March 14, 1966 by Delgado in his account with the petitioner
Republic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its genuineness and
regularity. Later, Republic endorsed the check to FNCB by stamping on the back of the
check "all prior and/or lack of indorsement guaranteed" and presented it to FNCB for
payment through the Central Bank Clearing House. Believing the check was genuine, and
relying on the guaranty and endorsement of Republic appearing on the back of the check,
FNCB paid P9,240 to Republic through the Central Bank Clearing House on March 15,
1966.
On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check
in question. FNCB lost no time in recrediting P9,240 to SMC. On May 19, 1966, FNCB
informed Republic in writing of the alteration and the forgery of the endorsement of J.
Roberto C. Delgado. By then, Delgado had already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the
latter's endorsement and guaranty. Republic refused, claiming there was delay in giving it
notice of the alteration; that it was not guilty of negligence; that it was the drawer's
(SMC's) fault in drawing the check in such a way as to permit the insertion of numerals
increasing the amount; that FNCB, as drawee, was absolved of any liability to the drawer
(SMC), thus, FNCB had no right of recourse against Republic.
On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to
FNCB with 6% interest per annum from February 27, 1967 until fully paid, plus P2,000 for
attorney's fees and costs of the suit. The Court of Appeals affirmed that decision, but
modified the award of attorney's fees by reducing it to P1,000 without pronouncement as
to costs (CA-G.R. No. 41691-R, December 22, 1975). cdrep

In this petition for review, the lone issue is whether Republic, as the collecting bank, is
protected, by the 24-hour clearing house rule, found in CB Circular No. 9, as amended, from
liability to refund the amount paid by FNCB, as drawee of the SMC dividend check.
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as
amended, provides:
"Items which should be returned for any reason whatsoever shall be returned
directly to the bank, institution or entity from which the item was received. For this
purpose, the Receipt for Returned Checks (Cash Form No. 9) should be used. The
original and duplicate copies of said Receipt shall be given to the Bank, institution
or entity which returned the items and the triplicate copy should be retained by the
bank, institution or entity whose demand is being returned. At the following
clearing, the original of the Receipt for Returned Checks shall be presented
through the Clearing Office as a demand against the bank, institution or entity
whose item has been returned. Nothing in this section shall prevent the returned
items from being settled by direct reimbursement to the bank, institution or entity
returning the items. All items cleared at 11:00 o'clock A.M. shall be returned not
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 later than 2:00 o'clock P.M. on the same day and all items cleared at 3:00 o'clock
P.M. shall be returned not later than 8:30 A.M. of the following business day
except for items cleared on Saturday which may be returned not later than 8:30
A.M. of the following day."

The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic vs.
Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. vs. First
National City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank or last endorser, as a
general rule, bears the loss (Banco de Oro Savings & Mortgage Bank vs. Equitable Banking
Corp., 167 SCRA 188). But the unqualified endorsement of the collecting bank on the
check should be read together with the 24-hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. vs. First National City Bank, supra). Thus, when the drawee
bank fails to return a forged or altered check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability. The following decisions of
this Court are also relevant and persuasive:
In Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co. (35 SCRA 140), a
check for P14,608.05 was drawn by the Philippine Long Distance Telephone Company on
the Hongkong & Shanghai Banking Corporation payable to the same bank. It was mailed to
the payee but fell into the hands of a certain Florentino Changco who erased the name of
the payee, typed his own name, and thereafter deposited the altered check in his account
in the People's Bank & Trust Co. which presented it to the drawee bank with the following
indorsement: LLphil

"For clearance, clearing office. All prior endorsements and or lack of

endorsements guaranteed. People's Bank and Trust Company."

The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the
People's Bank credited Changco with the amount of the check. Changco thereafter
withdrew the contents of his bank account. A month later, when the check was returned to
PLDT, the alteration was discovered. The Hongkong & Shanghai Bank sued to recover from
the People's Bank the sum of P14,608.05. The complaint was dismissed. Affirming the
decision of the trial court, this Court held:
"The entire case of plaintiff is based on the indorsement that has been heretofore
copied — namely, a guarantee of all prior indorsement, made by People's Bank
and since such an indorsement carries with it a concomitant guarantee of
genuineness, the People's Bank is liable to the Hongkong Shanghai Bank for
alteration made in the name of payee. On the other hand, the People's Bank relies
on the '24-hour' regulation of the Central Bank that requires after a clearing, that
all cleared items must be returned not later than 3:00 P.M. of the following
business day. And since the Hongkong Shanghai Bank only advised the People's
Bank as to the alteration on April 12, 1965 or 27 days after clearing, the People's
Bank claims that it is now too late to do so. This regulation of the Central Bank as
to 24 hours is challenged by Plaintiff Bank as being merely part of an ingenious
device to facilitate banking transactions. Be that what it may — as both Plaintiff
as well as Defendant Banks are part of our banking system and both are subject
to regulations of the Central Bank — they are both bound by such regulations. . . .
But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during
clearing house operations. The indorsement, itself, is very clear when it begins
with the words 'For clearance, clearing office . . .' In other words, such an
indorsement must be read together with the 24-hour regulation on clearing House
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 Operations of the Central Bank. Once that 24-hour period is over, the liability on
such an indorsement has ceased. This being so, Plaintiff Bank has not made out
a case for relief."

"xxx xxx xxx

"Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention
is made of a principle on which defendant Bank could have acted without
incurring the liability now sought to be imposed by plaintiff. Thus: 'It is a settled
rule that a person who presents for payment checks such as are here involved
guarantees the genuineness of the check, and the drawee bank need concern
itself with nothing but the genuineness of the signature, and the state of the
account with it of the drawee.' (Interstate Trust Co. vs. United States National
Bank, 185 Pac. 260 [1919]). If at all, then, whatever remedy the plaintiff has would
lie not against defendant Bank but as against the party responsible for changing
the name of the payee. Its failure to call the attention of defendant Bank as to
such alteration until after the lapse of 27 days would, in the light of the above
Central Bank circular, negate whatever right it might have had against defendant
Bank. . . ." (35 SCRA 140, 142-143; 145-146.)

In Metropolitan Bank & Trust Co. vs. First National City Bank, et al. (118 SCRA 537, 542) a
check for P50, drawn by Joaquin Cunanan and Company on its account at FNCB and
payable to Manila Polo Club, was altered by changing the amount to P50,000 and the
payee was changed to "Cash." It was deposited by a certain Salvador Sales in his current
account in the Metropolitan Bank which sent it to the clearing house. The check was
cleared the same day by FNCB which paid the amount of P50,000 to Metro Bank. Sales
immediately withdrew the whole amount and closed his account. Nine (9) days later, the
alteration was discovered and FNCB sought to recover from Metro Bank what it had paid.
The trial court and the Court of Appeals rendered judgment for FNCB but this Court
reversed it. We ruled:
"The validity of the 24-hour clearing house regulation has been upheld by this
Court in Republic vs. Equitable Banking Corporation, 10 SCRA 8 (1964). As held
therein, since both parties are part of our banking system, and both are subject to
the regulations of the Central Bank, they are bound by the 24-hour clearing house
rule of the Central Bank.prLL

"In this case, the check was not returned to Metro Bank in accordance with the 24-
hour clearing house period, but was cleared by FNCB. Failure of FNCB, therefore,
to call the attention of Metro Bank to the alteration of the check in question until
after the lapse of nine days, negates whatever right it might have had against
Metro Bank in the light of the said Central Bank Circular. Its remedy lies not
against Metro Bank, but against the party responsible for changing the name of
the payee (Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co., 35
SCRA 140) and the amount on the face of the check." (p. 542.)

Every bank that issues checks for the use of its customers should know whether or not the
drawer's signature thereon is genuine, whether there are sufficient funds in the drawer's
account to cover checks issued, and it should be able to detect alterations, erasures,
superimpositions or intercalations thereon, for these instruments are prepared, printed
and issued by itself, it has control of the drawer's account, and it is supposed to be familiar
with the drawer's signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. Unless an alteration is
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 attributable to the fault or negligence of the drawer himself, such as when he leaves
spaces on the check which would allow the fraudulent insertion of additional numerals in
the amount appearing thereon, the remedy of the drawee bank that negligently clears a
forged and/or altered check for payment is against the party responsible for the forgery or
alteration (Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co., 35 SCRA
140), otherwise, it bears the loss. It may not charge the amount so paid to the account of
the drawer, if the latter was free from blame, nor recover it from the collecting bank if the
latter made payment after proper clearance from the drawee. As this Court pointed out in
Philippine National Bank vs. Quimpo, et al., 158 SCRA 582, 584:
"There is nothing inequitable in such a rule for if in the regular course of business
the check comes to the drawee bank which, having the opportunity to ascertain its
character, pronounces it to be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of duty which the commercial law
places upon it, and the result of its negligence must rest upon it."

The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank,
the burden of loss for the payment of the altered SMC check, the fraudulent character of
which FNCB failed to detect and warn Republic about, within the 24-hour clearing house
rule. The Court of Appeals departed from the ruling of this Court in an earlier PNB case,
that:
"Where a loss, which must be borne by one of two parties alike innocent of
forgery, can be traced to the neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional fraud, through whose means
it has succeeded. (Phil. National Bank vs. National City Bank of New York, 63 Phil.
711, 733.)"

WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is
hereby reversed and set aside, and another is entered absolving the petitioner Republic
Bank from liability to refund to the First National City Bank the sum of P9,240, which the
latter paid on the check in question. No costs.
SO ORDERED.
Narvasa, Gancayco and Medialdea, JJ., concur.
Cruz, J., took no part.

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